Enterprise Products Partners: A Pipeline Cash Machine

Enterprise Products Partners L.P (NYSE:EPD). provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the United States, Canada, and Gulf of Mexico. Enterprise Products Partners is the largest pipeline master limited partnership in the US. This dividend achiever has managed to boost distributions to unitholders for 15 years in a row.

Since it went public in 1998, the partnership has had the following objectives in mind:

1) Invest in growth opportunities to build or acquire energy infrastructure that will generate returns on investment grate than long term cash cost of capital 2) Provide partners with periodic increases in cash distributions and an attractive total return on investment 3) Preserve financial flexibility and maintain an investment grade balance

Few companies have specifically set the goal to increase distributions to their owners. The partnership has done a great job in accomplishing these goals.

The MLP has managed to grow organically, as well as through strategic acquisitions. In 2009, it acquired Teppco Partners, which provided geographic and business diversity to its operations. In 2011, Enterprise Products also completed the acquisition of Duncan Energy Partners. The 2010 merger with Enterprise GP Holdings, essentially eliminated incentive distribution rights, which typically cap distribution growth in mature MLPs. It has managed to balance distributions growth with the retention of distributable cash flows. As a result of the elimination of incentive distribution rights in 2010, the partnership's cost of capital has been substantially decreased. This is good news for unitholders, because it means that there will be less of a need for raising capital exclusively through stock unit issuance.

Besides through acquisitions, Enterprise Products Partners is going to grow its portfolio of fee generating assets through its massive capital expansion program. The partnership expects to invest $6.50 billion in capital projects between 2012 and 2014, half of which will be related to Eagle Ford shale projects. These projects include over 300 miles of natural gas pipelines, a 600 million cubic feet per day cryogenic natural gas processing plant, 127 miles of NGL pipelines and 140 miles of crude oil pipelines. In the fourth quarter of 2011, the partnership completed the $1.50 billion dollar Haynesville Extension of its Acadian natural gas pipeline system. This 270-mile natural gas pipeline will have the capacity to transport up to 1.8 Bcfd of production from the Haynesville/Bossier Shale to industrial and utility markets in South Louisiana and, through connections with other pipelines, to markets in the northeastern and southeastern United States.

The ten year annual distribution growth has been 7.60%/year. At this rate, distributions would double every decade. The partnership is not a taxable entity, which means that income, gains, losses and any deductions or credits flow through on the individual unitholders' tax returns. In addition, a large portion of MLP distributions are tax deferred. For example, I held EPD units for about 7 months in 2011, and almost all of my distribution income was tax deferred. It decreased my basis in the partnership, which means that when I sell, I will have to pay higher taxes. In addition, once my basis falls to zero, all the business income would be taxable as an ordinary income. Capital gains or losses will be treated as capital income, not ordinary. Investors in Master Limited Partnerships typically receive a Schedule K-1 ( Form 1065), instead of a 1099-DIV. Although this has scared most new investors in MLP, most tax software and even enterprising do it your self investors can handle MLP taxes easily.

Since the partnership distributes a large portion of its cash flows to unitholders, dividend payout ratio is not a good metric for evaluating distribution sustainability. Instead, the Distributable Cash Flow (DCF) is a metric that is commonly used when evaluating distributions. Essentially DCF is calculated by adding certain non-cash items such as depreciation to net income, in addition to a few cash related items. The partnership has one of the best distribution coverages in comparison to other MLPs. In 2011 it had a distributable cash flow of $3.737 billion, and distributed $2.027 billion. Granted, this DCF included $1 billion in cash proceeds from sales of assets, but it still shows how the company more than comfortably can afford to pay and even increase its distributions to unitholders.

I have accumulated the majority of my position in the partnership in the low to mid $40's/unit. At the current distribution rate, a 5% entry yield corresponds to a price of $50.20/unit, while a 6% entry yield translates into an entry price of $41.83/unit. I would be more inclined to add to my position on dips below $42 - $44/unit.

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